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Hidden billions in tax reliefs revealed

The National Audit Office (NAO) has examined the cost calculations for non-structural tax reliefs which amount to £155bn per year. How many of these reliefs could be cut away in the 2020 Budget?

17th Feb 2020
Tax Writer Taxwriter Ltd
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The NAO released the ‘The management of tax expenditures’ report on Friday which reviewed the costs of different types of tax reliefs and how value for money of the key reliefs can be measured.   

What are tax reliefs?

Tax reliefs reduce the amount of tax a business or individual has to pay, and in doing so have a negative effect on the total amount of tax collected.

In 2018-19, the UK tax system contained 1190 different tax reliefs, of which 828 are regarded as a structural part of a tax, such as the personal allowance for income tax or the nil rate band for IHT.

The remaining 362 tax reliefs are not a structural part of a particular tax, but provide incentives for taxpayers to act in a certain way, such as R&D tax credits which encourage expenditure on research and development projects.

These non-structural tax reliefs are optional extras for the tax system and arguably add complexity while at the same time directing effort or funds towards social or economic objectives.

The NAO report calls these tax reliefs “tax expenditures”. Such reliefs are an important part of tax policy, but they are intrinsically variable costs as they can be removed or amended without changing the structure of the underlying tax.

What costs?

HMRC currently reports the estimated costs for 85 structural tax reliefs and for 111 non-structural reliefs. It is committed to reducing the number of uncosted tax reliefs, but collecting the additional data required will take several years. 

The cost of the 111 tax expenditures was estimated to be £155bn for 2018/19. This does not necessarily reflect the amount of tax collected if the tax reliefs were to be removed, as taxpayers would change their behaviour in response and perhaps switch to a different tax relief. 

Top of the charts

The five largest tax expenditures by value are:

  1. CGT main residence relief: £26.7bn.
  2. Employee contributions to pension schemes: £20.4bn
  3. Zero rate VAT on food: £18.3bn
  4. Employer contributions to pension schemes: £17.4bn
  5. Zero rate VAT on new homes: £14.8bn

These top five would all be very challenging for a Chancellor to attack, although there are rumours of a restriction on the higher rates of tax relief for employee pension contributions.   

The cost of entrepreneurs’ relief, which is widely tipped to be reformed in this year’s Budget, comes in at £2.2bn and placed 15 in the top 20 tax expenditures. This is only just below R&D tax credits (£2.3bn) and equally placed with the employment allowance, which will be significantly restricted in scope from 2020/21. Interestingly, the relief for traders not having to register for VAT when their turnover is under £85,000 is also costed at £2.2bn.

Could more of these middling tax reliefs be cut back in the March Budget?

Value for money?

The other side of the cost coin is the value each tax relief drives for the economy as a whole. Thus, determining whether a tax relief delivers value for money requires both the cost and the benefits to be measured. The NAO concludes that much more work could be done to evaluate whether particular tax reliefs are achieving their objectives.

John Cullinane, technical director of the CIOT, commented: “Unless they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be assumed to be value for money.”

This is an issue that the House of Commons public accounts committee has examined in the past and no doubt will come back to.

Meg Hillier MP, chair-elect of that committee, observed: “The Treasury and HMRC are still not serious about reviewing tax reliefs. Of those reliefs with policy objectives, less than a third have been costed, less than one in five have been assessed for value for money and few reliefs have been formally evaluated. 

“The Treasury and HMRC must work better together by formally establishing their accountabilities and ensuring greater transparency. It is about time tax reliefs were given the same amount of attention as public spending.”

Replies (8)

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By raychidell
17th Feb 2020 10:59

Thanks Rebecca - a good summary of a complex report.

I was trying to decide whether capital allowances (my own pet topic) were structural or non-structural, and see that they are given as an example of something that straddles the two categories. ("Some capital allowances have elements of both structural reliefs (that is, they help define the boundaries and thresholds of the tax system) and tax expenditures. Tax expenditures are tax reliefs which government uses to encourage particular groups, activities or products in order to achieve economic or social objectives.")

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By Justin Bryant
17th Feb 2020 11:35

I've never understood the economic justification for pensions & tax relief thereon to be discouraged. Most of the UK's wealth is in pensions having been sensibly encouraged by Governments over the years. It's a bit like a sovereign fund but owned directly by the nation's inhabitants. Without that the UK would be a much less wealthy nation. Can someone explain why that wealth would have been better off being spent (and likely wasted) by the Government in taxes?

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By Charlie Carne
17th Feb 2020 12:15

Fascinating analysis. Thank you, Rebecca.

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By tedbuck
18th Feb 2020 11:26

Hitting the pensions relief is an easy target for the Government but it has long term consequences like Blair's and Brown's attacks on pensions by removing the ACT on dividends.
Finance for business comes to a great degree from pension funds who invest in plcs and other companies and land. Without the investments capital would be harder to raise and thus more expensive. Profits would reduce and tax receipts would follow.
Investments into pensions would reduce so at the mid market people level the incentive to do something else for retirement or to rely more on the state would inevitably mean problems in the future, and this at a time when HMG have been pushing people to invest in pensions through AE Wrong message to give I think.

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Replying to tedbuck:
Hallerud at Easter
By DJKL
18th Feb 2020 15:03

Agreed, and remember the laws of unexpected consequences.

I currently value my pension contributions but frankly if only 20% relief maybe the monies would be better spent buying a BTL (thought there was a shortage of houses for owner occupiers/they were being priced out of market etc but what the heck )

When HMG/ HMRC act they certainly modify behaviour, and there is worse to come, currently HMG gets to tax these pensions in the future, but no incentive no pension saving. Maybe I use an ISA instead, and longer term they must be aware that the golden age of non portable pension taxing is already on the wane, whilst my wife and myself have reasonable pension funds by modern standards they are already far less than those of the generations who retired in the 1980s, 1990, 2000s.

There is already a drag on future tax receipts from pensions (A bit akin to an HMG saving plan, get the money in now the tax out later), restrict pensions and all you are going to get is AE contributions and all the other contributions made by choice will become a thing of the past.

HMG are typical of their kind, price of everything value of nothing.

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By David Gordon FCCA
18th Feb 2020 13:39

This form of writing is poisonous.
Tax reliefs are not a "Cost". This is HMRC bullsh*t.

Our system is supposed to be that parliament legislates and HMRC carries out its instructions. Unfortunately MPs would rather eat live worms than carefully work through tax legislation.
When, supposedly, legislators carefully (?) work through tax proposals, were they to do their work conscientiously, they would ascertain the value of the tax after taking into account exemptions and so on. Pink Pigs will fly before that happens.
"Reliefs" are not a "Cost". They are part of the structure of the tax.
To refer to them as as a stand-alone cost available for cost cutting, is to play the lazy legislators' game with overbearing HMRC's game.
Pensions relief is a typical example. First, it is not a "Give-away" it is a postponement. All pensions are eventually taxed.
Second, the Persons in Substantial Control forget that one man's Rolls Royce is six guys' jobs.
Third, that having recognised that pensions are a "Social Good" to the extent that the PSCs have made pension provision a statutory duty, they want to penalise persons who happened to have done well for themselves.
The PSCs should keep in mind the furore this idea created with medical staff.
At the other end of the spectrum, my craftsmen clients who stop work each year when they get within sniffing distance of the VAT limit.
PSCs should take this lesson into account:
Twenty years ago I had a client who worked his [***] off. As a result his earnings were about triple his employer set target. We claimed expenses Wholly, exclusively, and Necessarily.
HMRC accepted that the expenses claimed were wholly allowable, but:
HMRC claimed, because part of his income was "Voluntary" in that he did not necessarily have to earn it in order to keep his job. (That part above his given target) the expenses related to this were not necessary so not allowable. HMRC argued they had case law to support their position. It took three years, including a visit from two inspectors from Manchester to Essex, before we showed them the door.
The current discussion has a similar green-eyes woolly logic to it.

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By AndyC555
19th Feb 2020 11:29

"there are rumours of a restriction on the higher rates of tax relief for employee pension contributions."

There often are. I do wish the accountancy profession was a bit more active in pointing out how illogical the attack is. The argument in favour of restriction being that "tax relief means it only costs 60p for a higher rate taxpayer to put £1 into their pension whereas it costs 80p for a basic rate taxpayer" and that this is somehow 'unfair'.

This is nonsense. Taxpayers at all rates of tax earn £1 and put £1 into their pension.

If the logic of restriction held, the why not apply it to all tax deductible expenditure?

"Tax relief means it only costs £6 for a higher rate taxpaying plumber to buy a £10 wrench whereas it costs £8 for a basic rate taxpaying plumber. This is unfair and tax relief should be restricted." Bonkers isn't it.

As to who benefits, yes 40% of all pension tax relief goes to the highest earning 10% but as the highest earning 10% are paying 60% of all income tax this doesn't seem unreasonable.

Public discourse on tax seems to be dominated by the mendacious, the disingenuous and the ill-informed. I do wish the accountancy bodies could at least be putting the other side of the arguments.

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By David Heaton
24th Feb 2020 12:50

The Guardian in particular, and certain other newspapers, are wedded to campaigning to restrict pension tax relief to the basic rate, without any clear notion of how it might be done, let alone what effects it might have on investment. All they see is the huge 'cost' (for which read 'deferral') of tax not collected until members retire.

None of the journalists can ever explain how their pet plan might work and be fair to all concerned.

For one thing, and inexplicably, they are completely blind (despite the NHS consultants overtime debacle) to the annual and lifetime allowances, which are a proxy for taxing the better-off on their pensions. For a typical 65-year-old couple in good health, a £1m pot currently gets a joint-life pension, 50% to surviving spouse, with RPI indexation and no guarantees, of just £22,400. That is not 'fat cat' territory, but that's the effect of the lifetime allowance introduced by Darling and screwed down tighter by Osborne so as to claw back more of the 45% and 40% tax relief given on contributions. In a typical old-fashioned DB scheme, that's the pension you'd get from earning £33,600 pa at retirement. Even in a career average salary scheme, it's not huge.

For another, they can't say how they would limit tax relief to 20% in defined benefit schemes, where employer contributions often have no direct attribution to particular employees. The actuary tells the employer how much to pay in respect of the current, past and projected employee payroll, often with payment plans spread over a number of years to deal with under-funding caused by market crashes. How do you tax the higher-rate taxpayers on the amount that relates to them (other than by sweeping up by the broad-brush annual allowance and lifetime allowance)? They might cap relief on employee contributions, but employers would just switch to salary sacrifice to dodge the cap. If you can't do it for DB schemes, it wouldn't be fair to limit relief for those in DC schemes.

A radical Labour chancellor might think about forcing everyone out of DB into DC (since many employers have been moving that way anyway), which would enable the 20%-cap dream to come true, but (a) think of the complexity and period of the transitional rules, (b) when are we going to see Labour back in government, and (c) how many pensioner and about-to-be-pensioner voters could they afford to upset with such a policy even if miracles did happen? It's not going to happen.

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